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Sonic's West Coast Expansion Plans

The biggest chain of drive-in restaurants in the U.S., Sonic Corp. (SONC) recently inked a deal to set up five new drive-ins in San Diego County and 10 new drive-ins in the greater Los Angeles area in association with present franchise partner, SPG Management. The restaurants will be developed over the next six years.

Oklahoma-based Sonic has a long-standing relationship with SPG Management. The franchise partner boasts superior local market knowledge and a proven track record in the restaurant industry. One of SPG’s principals even served as a CFO for a McDonald's Corp. (MCD) contractor and helped build 70 McDonald's restaurants during his tenure.

SPG currently owns and operates five other Sonic Drive-Ins in Southern California. We believe, the latest alliance reflects Sonic’s intent to make California one of the prime markets for expansion considering the state’s potential to generate about $67.4 billion in restaurant sales in 2013, as per the national restaurant association.

Not only Sonic, another restaurateur Dunkin Donuts, a subsidiary of Dunkin' Brands Group Inc. (DNKN), is also considering expansion opportunities in the markets of Los Angeles, Riverside, San Diego, San Bernardino, Ventura and Orange counties. Dunkin is planning to open new restaurants in these regions by 2015.

A Zacks Rank #3 (Hold) company, Sonic is gradually moving in a positive direction. The highlights of its second-quarter 2013 earnings, reported in March, were strong comps momentum and margin expansion based on stringent cost control measures. On the developmental front, Sonic is aggressively tapping existing and new markets and is primarily focusing on franchise development.

It also cut a franchise development deal this month for five new drive-ins in the Rochester, NY market over the next four years. As part of its initiative to expand into new markets such as the Northeast, it is teaming up with franchisees to test new drive-in prototypes that cater to market specific needs.

At the end of the second quarter of 2013, this drive-in fast food chain operator had a total of 3,526 drive-in restaurants. Management expects new franchise drive-in openings in fiscal 2013 to be slightly higher than fiscal 2012. However, Sonic anticipates the rate of growth to accelerate in 2014. Another eatery worth considering is AFC Enterprises Inc. (AFCE) carrying Zacks Rank #2 (Buy).